Wednesday, July 31, 2013

Cornering markets fleeces consumers

   Whether it’s pork bellies or potatoes, copper or chocolate, anyone able to create an artificial shortage of a commodity can drive up the price. Corner the market and fleece the consumer.
    Manipulating commodities markets isn’t new. During the 19th-century era of robber barons, speculators Jay Gould and Jim Fisk tried to corner the gold market, triggered an economic panic and came close to crashing the American economy.
    In 1979, the billionaire Hunt brothers, Nelson Bunker and William Herbert, of Texas, along with a group of wealthy Arabs, set out to corner the silver market. At one point they controlled 50 percent of the world’s silver. Northern Idaho cities like Kellogg and Wallace boomed as silver prices rose from $1.50 to $50 an ounce.
    Booms always burst, even those artificially created. Even the Hunt brothers couldn’t handle the overheated market they helped to create. They failed to meet a $135 million margin call and in 1988 were convicted of conspiring to manipulate the market. The Spokesman Review of Spokane, Wash., described what happened to Idaho’s silver country: “Thudding silver prices took their toll on the Silver Valley. Mines closed as silver entered a long period of depressed prices.”
    Manipulation of commodities markets on a grand scale has seemingly unrelated but often far-reaching consequences. For example, in the late 1990s, traders at Enron, an energy company, drove up electricity prices and forced an artificial power crisis in California. According to internal Enron documents released by federal regulators, these questionable techniques not only cost California consumers higher than necessary power bills, they led to the recall of Gov. Gray Davis.
    In 1999, Glass-Steagall, aka the federal Banking Act of 1933 that kept banks from investing in speculative ventures, was eliminated by Congress. Suddenly, the race for obscene returns was on and the country, in fact the world, has been left with banks too big to fail, but not too big to engage in commodities manipulation.
    The bank Goldman Sachs was recently accused of cornering the aluminum warehouse market. Why is this a problem?
    When The New York Times discovered and analyzed Goldman’s practices in a monopoly situation, it found artificially higher prices allegedly cost U.S. consumers $5 billion in the past three years.
    A bipartisan group including Sens. Elizabeth Warren, D-Mass.; Maria Cantwell, D-Wash.; John McCain, R-Ariz.; and Agnes King, I-Maine; are all pushing for reinstatement of Glass-Steagall.
    The big banks and their legion of lobbyists will fight to keep regulators at bay. Voters must be equally adamant about stopping them.
    Gold, silver, energy, and now the price of a can of Coca-Cola, are clear demonstrations of why transparent and fair commodities markets count.

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